Editor's Page -- Stronger Leadership Is The Answer

From the looks of it, leaders of the major associations representing manufacturing and business are pretty happy with President Bush's economic stimulus plan, despite the fact that many items on their tax relief/pro-growth agendas are not included. The National Association of Manufacturers, The Business Roundtable, the U.S. Chamber of Commerce and Manufacturers Alliance/MAPI all issued press releases with unqualified support of the plan. Only the Association for Manufacturing Technology expressed the slightest criticism, saying: "We do, however, believe that the movement toward first-year expensing should be extended to all businesses . . ." A lot of the reason for the acquiescence is, no doubt, expedience. With the economy sputtering along, any type of boost is better than wrangling debate about what form it should take. We're willing to set aside -- for now -- our specific requests in exchange for anything done quickly. Also, from the political perspective, perhaps it's better to support the president publicly and work behind the scenes for changes rather than confront him head on. Given the situation, however, I'm leery of how this strategy will play out in the long run. Frankly, the plan isn't the best strategy for boosting the economy. Though stunning in its boldness, it won't be as effective as other alternatives in jump-starting business investment -- the real cause of the current recession. Enhanced capital cost recovery for all corporations, a permanent R&D tax credit or a corporate tax deduction for dividend payouts would more directly boost business investment. As it is, the plan's centerpiece, elimination of the shareholder tax on dividends, will spur business investment only if it works perfectly. To do so, it must draw more investors into the equity market to increase the value of equities and lower the cost of capital, which then will encourage business investment. Also, the consumers must spend their dividend tax savings. Even if it does work -- and that's a big if -- it's certainly going to take longer than giving the tax breaks directly to business. Further, the deficit that results from this plan could have two negative consequences. It could raise the cost of capital by raising interest rates and wipe out the opportunity to implement better long-term growth initiatives. Some have argued that giving businesses the breaks wouldn't spur business investment because they're waiting until the consumer starts buying again. This seems an odd claim considering the consumer, bolstered by tax cuts and low interest rates in the past couple of years, has been the hero holding up the economy during the downturn. (True, the consumer is weakening, but how long can we expect him to hold out while business-buyers sit on the sidelines?) Besides, there's an income tax cut in the plan that addresses the consumer side of the equation. Business executives are risk-takers. If Bush alters his plan to reduce the risk of business investment by even a modest amount, executives will start buying again. It's lack of business-to-business spending -- not consumer spending -- that's hamstrung the economy, and that needs to be addressed head on. Bush has taken the winding trail to his destination rather than the direct route because the latter is filled with political potholes. It's politically risky to help the one group largely viewed as having their hands in the till the past couple of years. But that's what leadership is all about. And we need to tell him that loudly and clearly. Patricia Panchak is IW's editor-in-chief. She is based in Cleveland.